🔴 Will A Recession Crush Venture Capital in 2020? | Recession Watch

TL;DR

The content discusses the risks of illiquidity in the economy and venture capital market, highlighting factors such as an aging population, negative yielding interest rates, and the potential for a liquidity crisis.

Transcript

Josh finally we get together because always Mike Greenlee get to see you so we get together because I Have this hypothesis that I'm testing out on a lot of people that I respect to see Whether the US or the world, it is potentially going to recession. I have a feeling that it is I'm not 100% certain I know it's getting weak and I know that you see ... Read More

Key Insights

• 🤕 Illiquidity in the economy and venture capital market is a growing concern, with factors such as an aging population and negative yielding interest rates contributing to the issue.
• ✳️ The increase in illiquid investments, such as government debt and venture capital funding, poses risks to investors, especially if there is a liquidity crisis.
• 💨 Retail investors are buying more government debt as a way to generate income in a low-interest-rate environment, but this exposes them to potential losses if the debt turns out to be illiquid or not investment grade.
• 🔠 The liquidity crunch in the venture capital market could result in a contraction of available capital, leading to a consolidation of funds and a decrease in investment opportunities.
• 🌐 The interconnectedness of the global economy means that risks in one sector, such as European banks, could have a knock-on effect on other sectors, including venture capital.
• 😘 The current climate of low interest rates and abundant capital has led to the rapid growth of startups and unicorns, but their profitability and sustainability in the long term is uncertain.
• 🥺 The potential for a narrative change in the market, where investors prioritize profitable growth over equity-funded growth, could lead to a reassessment of valuations and a reevaluation of investment strategies.

Questions & Answers

Q: What are some factors contributing to illiquidity in the market?

There are several factors contributing to illiquidity, including an aging population, negative yielding interest rates, and an increase in illiquid investments.

Q: Why are retail investors buying more government debt?

Retail investors are buying more government debt due to the narrative of an aging population and the belief that investing in debt is a safe option for retirees looking for a return on their principal.

Q: How does illiquidity pose a risk to investors?

Illiquidity poses risks to investors as there is a potential for permanent impairment of principal, especially if retirees start selling out of their fixed income and equity funds. It can also lead to a liquidity crisis, where assets that were thought to be investment grade turn out to be illiquid.

Q: Who are the marginal buyers in the venture capital market?

The marginal buyers in the venture capital market include crossover hedge funds, growth equity investors, and SoftBank. However, if these sources of capital dry up, it could lead to a liquidity crunch in the private markets.

Summary & Key Takeaways

• Illiquidity is becoming a concern in the market, with factors such as an aging population and negative yielding interest rates contributing to the issue.

• In the US, 60% of buyers of government debt are retail investors, which is double the percentage from a few years ago.

• The increase in illiquid investments, combined with the potential for a liquidity crisis, poses risks to investors, especially those in the fixed income, mutual fund, and venture capital markets.